Ep. 36: Real Estate vs. Market Volatility

Transcription:

Thomas Young:

Welcome back everyone to Rocket Your Dollar. Today I've got Ben Kogut with me. And Ben is a partner at HJH Investments, specializing in investor relations and raising capital, something that's relevant to our world as well. Ben is also an Austin, Texas-based commercial real estate broker with more than 15 years of experience. His passion is to help investors make wise decisions. And Ben studied government and business at the University of Texas and later earned his MBA from the Acton School of Business. He also CCIM certified. Ben, thanks for being here.

Ben Kogut:

My pleasure, thanks for having me.

Thomas Young:

I know we're recording all of these episodes virtually now. And normally we get together at Capital Factory, but how's virtual remote work treating you?

Ben Kogut:

It's fine. I find myself looking around the house, looking for things to clean or organize. And I'm running low on things. But I'm happy. I don't have any dogs or kids at home so I just get to do whatever I want all day. It's quite nice.

Thomas Young:

Yeah, we were discussing that right before we started recording that there are pros and cons to everything and living alone. I live alone as well and it's been nice to be able to set up my desk fully at home and just ... It's nice to just sit here and work and not have to worry about anything else. I know some of you are listening at home with kids and dogs and everything, and I hope everybody's staying sane and semi-productive. But Ben, let's jump into what you do. Tell me a little bit about HJH Investments and what you do there. And then what it does as a whole.

Ben Kogut:

Yeah, HJH Investments is a boutique commercial real estate syndication firm. We specialize in buying assets where at least 30% of the tenancy is BBB credit or higher. With more than five years of lease term remaining. So in other words, we buy assets of our tenants with long term leases. And we do retail, office, and industrial property types. So unlike a lot of other people, we don't touch multi-family whatsoever. It's driven by having that consistent cash flow from our commercial tenants.

And then, we put together partnerships on a deal by deal basis. For example, in 2019, we syndicated 11 deals. So almost every month, we're buying something new. And we're still pretty much on track for that in 2020. We're still moving forward on several deals right now. And each deal stands on its own and when the deal is identified, fully vetted and then once we have a bank debt lined up. And that's when I get involved, raising capital and going to the properties and explain to people about what it is that we're buying and how we're doing it and that kind of thing.

Thomas Young:

Yeah, and I've heard it's going to get a little more interesting here going forward and we'll hit on that in a little bit. But so when you go, you said you're on a deal by deal basis. And so any time that you guys identify a property, do you guys have a list of investors? I mean do you raise money from individuals or who are you primarily raising money from?

Ben Kogut:

Yes. So we raise money from accredited individuals. So it's just from relationships that we have, that I have, and that my partner, Cory Harkleroad, has. We'll put together an investor deck and then approach our investors. Explain to them about the deal. What we like about the deal. What the downsides potentially could be for the deal. And then the individuals will have an opportunity to participate with us through the syndication process.

Thomas Young:

Fantastic. That sounds like a lot of work, right? Every month a new deal. But I'm sure you have investors that you can call that are just repeat-investors and they probably just go in on every deal with you because they trust right? And because they know who you are and your results?

Ben Kogut:

Absolutely, yeah. I mean definitely, a chunk of every deal is consistent investors who love to diversify their cash flow by investing some of their money in a deal by deal by deal basis. And we intentionally rotate between retail office and industrial property types to not only diversify our assets but also to give our investors an opportunity to see a lot of different types of asset classes to be able to diversify from their investment standpoint as well. So yeah, so some people just, every single time, like sometimes they don't even ask a lot of questions and they just throw money in.

And sometimes we'll have somebody that has a situation where they have a large 1031 exchange and they want to exchange that money into the deal. Or they, for example, they have money in the stock market and they want to pull that out and it happens to be in their self-directed IRA. And they can direct their IRA. We have a structure where they can come into one of our deals. So it just depends on timing also.

Thomas Young:

Right, yeah. Like anything, I mean timing is important. I like what you touched on about the 1031 exchange for people that aren't ... If they're doing this in a self-directed IRA, the 1031 exchange is a moot point because of the nature of retirement accounts. But the fact that you guys have so much deal flow makes it attractive for people that find themselves in a situation where they need to identify quickly an investment to execute 1031 exchange. So that's good.

Ben Kogut:

And we'll somewhere between two and three deals in our pipeline that we are actively pursuing. We'll usually have more than that that we're negotiating on the front end, but anything going for [inaudible 00:06:17] deals in process, we'll probably have two or three deals. Like at the moment, we have two deals that we're moving forward with. And we just sit in April 2020, so I know not a lot of people are doing that, but we ... As I said, we're finding high credit tenants with long term leases that are going to weather this storm that we're in right now no matter what.

Thomas Young:

Right. But I'm curious, what are you guys thinking, there's been a lot of talk about this whole work from home thing. And I think a lot of large companies are seeing that people are being productive. Employee productivity is high on a work from home basis. Do you think that's going to affect the market at all for office space going forward? In Austin or more broadly?

Ben Kogut:

Well, none of our assets are in Austin. Most of them are throughout the Midwest. Yes, of course, I think there will be some paradigm shift coming down the pipeline. Nobody quite knows exactly how that will be. But yeah, I think that companies like yourself that can be remote probably will stay that way. But I think that most companies are not, at least culturally set up that way. There's a lot to be said about being together in collaboration and things like that. So I don't think that it's going to be a massive shift. And it's just going to be on a case by case basis.

Thomas Young:

Yeah. And that was my next question was where you guys have a lot of your assets. Because that influences it, right? Because if you're in a very tech-heavy market like Austin that is set up well for remote where it might change more than if you're in a different area where there's maybe less tech or less acceptance of work from home. So I guess that also has a big impact on it, right?

Ben Kogut:

It does. Looking mentally through our portfolio, a lot of our assets are in secondary markets where it's just not part of the culture to work remotely. Otherwise, they would. And so, we've focused on really, really great tenants that yeah, at the moment, they are not officing together. But I don't, just thinking through, I think most of them are set up in a way where they have to be collaborative and they have to have teams put together. So then again, we have hundreds of tenants so it's tough to figure out who will and who won't but time will tell.

Thomas Young:

Yeah, no, it's for sure an interesting time. And I mean I don't think there's going to be a huge, huge shift. I mean you were speaking about culture internally, but as a working culture generally, I don't think it is going to have a huge impactful change on the way we work. And I know, I mean for me, I like working from home but I also really like the collaboration that you mentioned. And so I think a lot of people, us included, will find a happy medium between remote work and in-person work. But that's straying a little bit from our conversation.

So are you guys seeing new opportunities coming in 2020 as a result of this? I mean is there going to be ... Sort of what are you guys looking at on the real estate side and the commercial side with this whole shift? Because right now everybody's talking about the market and how it's gone bananas. But what are you guys thinking for the second half of 2020 as this plays out?

Ben Kogut:

Yeah, we're very optimistic from our business standpoint. We specialize in finding assets that have motivation. In other words, the sellers need to sell for some reason. Otherwise, it just doesn't work for us because we have to buy things for a significant discount. After all, we structure our deals where we pay an eight percent annual return. We pay it every month, starting on the month that we acquire the asset. So we think that there will be a lot more ... I think there will be a lot more motivation. And motivation can come in any shape and size. And oftentimes, sellers are motivated to sell for reasons that are not having anything to do with the actual property that they're selling. Like maybe they took a hit in the stock market and they need some cash flow over there or whatever.

I mean who knows? Maybe there's ... There might be some more divorces coming and assets need to be broken up. To be determined obviously but the point I'm trying to make is that we are well-positioned given that we have so many hundreds of investors that we work with. That we have actual personal relationships with. And what I'm hearing from people is there's still a significant amount of liquidity in the market waiting for opportunities. And so we're still moving forward full steam ahead. Our acquisitions department is actively continuing to search for deals. And I expect that we're going to continue to find them.

Thomas Young:

Yeah. And I think you're right. I mean there was such a ... I mean feel like so many people were preparing for ... We didn't know what was going to cause a market pullback or a recession. But I feel like a lot of people were ready for it. I mean we'd been in a bull market for so long and, we didn't know that it was going to be a virus that was ultimately going to cause it, but so there seems like there was a lot of cash on the sidelines. And a lot of people were thinking that this was coming. And so a lot of people were well-positioned to take advantage of the opportunity.

And obviously, we would have all preferred this not to happen. But within the situation we find ourselves, there's going to be a lot of opportunities. And folks like yourselves that are well-positioned to take advantage of what's coming in the next few years, I think are going to do very well. And do very well for their investors.

Ben Kogut:

Yeah, hopefully. I mean what I'm trying to do is make sure that we're doing a good job of communicating with our investors, with our tenants, with our partner, with our lenders. I think communication is super important at this stage of the game. And so far, it's been extremely positive. Everybody is supporting us and continues to understand that we invest with a long term strategy in mind. And so when you have that mentality, the short term crap that we're all going through right now is much, much more palatable.

So we still have a lot of issues to sort out. Like for example, one of our strategies was to ... About two weeks ago, so we were pretty early. Even before there was all the shelter in place rules. So mid-March, we sent letters and communications to all of our tenants. About 120 of them or so. And especially with the retail mom and pops, we preemptively offered them an opportunity not to have to pay April or May rent. In exchange, we're looking to negotiate with them capturing that on the backside or asking them to sign off on their options to extend their leases.

And so we've had some tenants call crying to our property management thanking us that we went ahead and just took that stress off their business to not have to worry about it. And luckily, we structure our deals. Out of the gate, we have significant amounts of capital reserves on each of the deals so that we can absorb that working capital loss right there. And so it's part of the overall strategy to protect our investor's capital. Which means that we, at this time, we need to protect our tenants to make sure or at least to do our best to make sure that they survive all this. And luckily, we're in a position to be able to help people.

And so really that's our mission right now is to try to just help as many people as we can. Because luckily, we're in a position to do that.

Thomas Young:

Yeah, and you touched on something really important. That it's a great time right now to have a lot of just flexibility around your business, right? Because you could be hard on rent and all that and it's going to lead to businesses failing and it's going to lead to a lot of negative things. But if you're in a position where you could ride out the storm, you're going to have better tenants. You're going to have happier tenants. You're going to have businesses that survive and can then start paying you to rent again versus you having to go out and find a new tenant for space. And if there is a lot of uncertainty, it's not the time to sign a new lease.

So I love the fact that you guys you're worried about your investors, but you know that in the long term, your investors will be better served by you thinking about your tenants first and foremost right now.

Ben Kogut:

Yeah. And it's about relationships. In my opinion, relationships with our tenants to let them know "Hey, we're not just like that landlord that's demanding a check on the first of every month." But we care about our tenants. I get this is a human issue and we're all in this together and we need to figure out how to come up with creative solutions. And so, I think the more that we can help each other out, I think, the better.

And to an extent, and it's not just about money. But I think, to an extent, there is more money to be had the more that we're able to help each other.

Thomas Young:

Absolutely. And I mean I was reading, I don't remember. It was Bloomberg or New York Times or I don't even know which one it is anymore. But about people's fears in this crisis. And getting the virus is not necessarily on the top of the list. I mean people are worried about their businesses. Their finances. A lot of small businesses are going to have a tough time just because the nature of small businesses is that a lot of them live pretty close to the edge a lot of the time. And people are really worried. But it goes back to it takes a village. If you have a good landlord or you have good investors or you just surrounding yourself with the right people and having the right people on your team will mean that we'll ultimately come out of this, I think stronger, because there's going to be a renewed sense of community and people helping each other out.

And I know for me, like supporting local businesses. Ordering food from local restaurants instead of the big chains. And going just everything you can to help out your community. And I think that's going to go from the most basic level up to landlords in real estate and everything and we'll come out of this ultimately stronger.

Ben Kogut:

Yeah, I agree. I want to emphasize that I've been trying to order food from restaurants as much as possible because I ... Especially my favorite restaurant. Selfishly, I'd hate to see them disappear after all this is gone so really guys, we all need to spend ... I mean look, we're all cooking from home. But we all need to also try to support them because they get hit the big time.

And then also, I mentioned like the flip side of this. This is the Rocket Your Dollar podcast, right? I'm also hearing from a lot of high net worth individuals who are just sick and tired of the volatility of the stock market. And the people that have already invested with us. They're just super excited about how we're staying consistent. Like with some of our industrial properties in particular, like they're unaffected and we are still moving forward as if there is no issue because they pay us rent and we pay our investors monthly dividends.

And that still goes for a lot of our office and retail properties too. But I just wanted to remind us that there is a significant amount of benefits to being invested, whether be cash or with your self-directed IRA, in commercial real estate syndications. And so, I just wanted to mention that as well.

Thomas Young:

Yeah, and I think what's going to happen is people that are overexposed to the market, once there is a recovery, I think right now everybody's ... Like if you took a big hit in the market recently, there's not a whole lot to do other than hold on right now. Like you're basically, you're in it, right? But once this is over, I think a lot of people that are overexposed to the market and they're going to get their money back, if you can hold on, you should.

But there's going to be a renewed appetite for different investments that are not correlated to what's going on in the market. And so, even though in the very short term, and this is what we're seeing at Rocket Dollar, there's a little bit of a lull in alternative investments. I think once the recovery comes back, people are going to be seeking these investments because they don't want to do this again. And they don't want to go through this roller coaster. And everybody knows that diversification is good and we need to do it. That doesn't mean everybody does it or is doing it effectively. So I think there's going to be an explosion of interest in investments like you guys and then different types of real estate and different types of just maybe lending.

Or I think one of the things that I think will be great is in the next few months, as restaurants open up, I think there's going to be a lot of revenue sharing notes that these restaurants are going to issue. And those are going to be fantastic investments. And you're supporting your community and investing locally or whatever. I'm sorry, I'm rambling, but I think it's going to be good and I think there's going to be an explosion of interest in the second half of this year.

Ben Kogut:

Yeah, I agree wholeheartedly. I'm still on the phones building relationships with people. A lot of Zoom calls with our existing investors most importantly. But then also, I'm constantly on with people who are seeking to understand who we are, who I am, what we're up to. What we're buying. How we perform. How we have things set up. Because we're a little bit different than other syndicators and yeah, I'm happy to get on a call with just about anybody and share with them about who we are and what we're up to.

And I also created a new podcast, like yourself. And then also, we've just finished updating our website which is, if you don't mind me saying, hjhinvestments.com. And then we put together some videos to educate people on there as well. So really just trying to build relationships and educate and help people as much as possible right now.

Thomas Young:

That's fantastic. And no, thank you for mentioning the site. My next question was going to be how people can best get a hold of you and we'll put the links to that website in the show notes of this episode so people can visit you. But if someone wants to get in touch with you, learn from you, have a call with you, what's the best way for them to go about it?

Ben Kogut:

Yeah, well first I'd direct you to our website, HJHinvestments.com. I love connecting with people on LinkedIn. You can find me on Instagram. I got all the Ben Kogut social media things locked in so the three other Ben Koguts of the world can't take it over. Like I just got the @benkogut TikTok so I've not posted any TikToks, but at least I have control of that.

Thomas Young:

Well, we have two more months or maybe six more weeks of quarantine. I estimate as of April 1st when we're recording this so I'm sure that TikTok account will get some use as you look for things to do. Keep an eye on them.

Ben Kogut:

Yeah.

Thomas Young:

But Ben, thank you so much for being here today and sharing what you guys are working on. What you guys are seeing for the rest of the year. And for taking the time to sit and talk to me.

Ben Kogut:

I appreciate the time. And this moment to remind everybody that we're all going to get through this and stay healthy and safe and try to find ways to help each other.